This document discusses the social costs of inflation. It defines inflation and notes that while the average person sees inflation as making them poorer, the costs depend on whether inflation is anticipated or unexpected. Social costs include both private costs and external costs not considered by individuals. The social costs of inflation fall into costs when inflation is expected, such as shoe leather costs and menu costs, and costs when inflation is unexpected, such as the arbitrary redistribution of purchasing power and increased uncertainty.

1. MACROECONOM
ICS
ASSIGNMENT ON SOCIAL COST
OF INFLATION

2. CENTRAL
UNIVERSITY OF
BIHAR
CENTRE FOR ECONOMIC STUDIES
AND
POLICIES
GROUP MEMBER
RAJNISH KUMAR
RAUNAK NAVIN

3. INFLATION
Inflation is defined as a sustained
increase in the general level of
prices for goods and services. It is
measured as an annual percentage
increase.
.

5. THE LAYMAN’S VIEW
If you ask the average person why
inflation is a social problem, he will
probably answer that inflation makes
him poorer. “Each year my boss gives me
a raise, but prices go up and that takes
some of my raise away from me.’’ The
implicit as -sumption in this statement
is that if there were no inflation, he
would get the same raise and be able to
buy more goods

6. SOCIAL COST
Social cost is the total cost to society. It
includes both private costs plus any
external costs
The social costs of smoking include the
passive smoking that other people
experience.

7. IMPORTANCE OF
SOCIAL COST
Rational choice theory suggests individuals
will only consider their private costs. For
example, if deciding how to travel, we will
consider the cost of petrol and time taken
to drive. However, we won’t take into
consideration the impact on the
environment or congestion levels for other
members in society.

8. Therefore, if social costs
significantly vary from private costs
then we may get a socially
inefficient outcome in a free
market.

9. SOCIAL COST OF
INFLATION
Almost everyone thinks inflation is evil,
but it isn't necessarily so. Inflation affects
different people in different ways. It also
depends on whether inflation is anticipated
or unanticipated. If the inflation rate
corresponds to what the majority of people
are expecting (anticipated inflation), then
we can compensate and the cost isn't high.
For example, banks can vary their interest
rates and workers can negotiate contracts
that include automatic wage hikes as the
price level goes up.

10. THE SOCIAL COSTS
OF INFLATION
…fall into two categories:
1. costs when inflation is expected
2. costs when inflation is different
than people
had expected

11. 1. SHOE LEATHER COST
def: the costs and inconveniences of
reducing
money balances to avoid the inflation
tax.
↑π ⇒ ↑i
⇒ ↓ real money balances
Remember: In long run, inflation does not
affect real income or real spending.

12. 2. MENU COSTS
def: The costs of changing
prices.

13. 3. RELATIVE PRICE
DISTORTIONS
Firms facing menu costs change
prices infrequently.

14. 4. UNFAIR TAX
TREATMENT
Some taxes are not adjusted to
account for
inflation, such as the capital gains tax.

15. THE COST OF
UNEXPECTED
INFLATION
Arbitrary redistribution of
purchasing power
 Ex: From lenders to borrowers
Increased uncertainty